whats riskier? having a home or not having one?

While I was on my reading spree during the recession, I had read an interesting bit of research. Richard Florida was talking about home ownership in cities. His hypothesis was that home ownership for a city is good but to a point. He says “This is so ironic, places with the highest levels of home ownership have low rates of growth; they tend to be older, lagging cities with older economic structures; they tend to be less innovative; they tend to have lower levels of human capital, of creative, economic activity; lower wages, lower incomes; and the people there have lower levels of well-being… by having a lower level of homeownership, and that’s around 50 or 55 percent,… actually makes them quite fast and flexible… If you lose your job in Detroit or Cleveland, you own your house: you’re stuck. You can’t even move to another part of Detroit or Cleveland for a job,… If you work in New York or Los Angeles or San Francisco and you lose your job, first thing you can do is downshift to a cheaper apartment, and if you need to move to a new region, when your lease ends, you can up and go”

I have put the larger extract below and the link to the complete interview. I found it interesting at the point. It did make sense. Flexibility is the key to business and hence growth. Housing is just one big strong element of getting stuck. My own firm, when I see it I realize this. As we get bigger we start getting inflexible. I have seen my management justify the bureaucracy, the willingness to accept it, unwillingness to tear down old practices, unwilling to take risk, having multiple levels of approvals and the sort. I guess a lot of it is possibly good. We are of course less tolerant of failure. The cost of failure is possibly too high. So it makes sense to take a few sturdier steps than big bold initiatives. But I also wonder isn’t a bigger firm more resilient to risk. More able to absorb the costs of failure and hence best placed to learn from it.

Smaller growing firms would have people with higher risk taking ability. People who just say ‘chuck it, let’s do it and go ahead’. I used to always say, it’s better to ask for forgiveness then to ask for permission. But suddenly larger firms clamp down on all of this. There are too many satraps to break through. Everyone seems to have his own domain which one is encroaching upon. These domains are nebulous and fluid when the organization is geared towards growth and rigid and unaccommodating when the organization is big. Simple things like the laptop brand is also a big issue. I came from one of the smaller divisions (250 employees) of my firm where I wanted a Dell laptop with a very good display. I got it. Here within the same group another division which has 4,000 plus employees, the Dell laptop which I got transferred with, gets undue attention. Here the official brand is Acer and you can’t get anything else. How was I roaming around with a Dell? Oh god man. All in the name of process.

I think process is good. Some things are important but too much process can screw up any initiative. Within my limited understanding and experience, my belief is that even creative can have a process. You must follow process but have the sense to know that the process is path but you are allowed to forge new paths. Logical behavior and thinking is not a barrier for creative. Just because you use the left side of your brain is no excuse for you to not use the right side as well, and vice versa. I think most of us inherently can use both sides well. It’s when we are suddenly rooted for some reason or the other we start exercising one side. The boring regimented predictable side and are impervious to outside thought and action.

I think the rooting of the brain happens when you start having too much at the table at stake. Typically this means a house. See the house by itself seems like an innocuous thing but over here buying a house would mean pledging the next 20 years of your life in equated monthly installments or EMI for short. Once you have EMI’s running, there is no chance that you are going to take risks. You start growing roots around the place. You start making friends, be familiar with the grocer, the milk man, the watchman… you build your life around your commute and then you are finished as a risk taker. Then having the monthly pay check coming in is very very serious business. Why – because the predictable monthly paycheck ties in very well with the infallible predictability of the EMI.

When I bought my first home it was a very fortuitous time. The EMI was at a fixed interest rate and housing prices very low. They were to just start their sky rocketing orbit. My home price has gone up 5 times since I bought it in 2004. At the time I was still ok with the EMI amount. In the slowdown of 2008, I wasn’t worried, I wasn’t scared. I saw my fixed income balance and I saw my liabilities and I slept in peace. Then I went ahead and bought my second larger house. I haven’t ever slept well if I thought about it. Earlier I would be nonchalant in my attitude. I would be able to call a spade a spade, but now I see myself thinking twice. I still try and push the bar but I am careful not to push it carrying my resignation in my pocket. I have become too big in my own life to fail. I have two EMI’s to feed. Hopefully the second house is ready for possession soon enough which would means that I can rent it and it becomes an income stream from an expense stream.

But there are other issues that stop me from taking risk and hence give me limited mobility. Jispa’s school and Matunga gymkhana around which we have revolved our life. Schooling is a huge issue in Mumbai. With a dearth of good schools and at reasonable price points we can’t afford to take risk with schooling. Jispa’s school is impossible to get into. We don’t know how we got through and it was a stroke of good luck. Once when I was offered a job in Europe in the same company I refused, how would I come back and get my daughter reinstated in the same school. It would have been a four to five year stint but how would I come back and fight again for admissions. As a city if we are unable to provide for or encourage good schooling we wouldn’t be able to attract and retain talent. Cities must also fight for talent in similar fashion. Now I understand the value of the Kendriya Vidyalayas that the government set up all over the country giving a uniform education for its entire government staff that would get transferred. Having schooling that is uniform and predictable for the child and the parent is so critical. And of course the gymkhana. Gymkhanas in Mumbai are elitist and restrictive. They open their doors only to members and memberships are limited and are opened only at intervals. Currently the Matunga Gymkhana is open for membership at a steep one million rupees. What the hell. Where does the average person train his daughter or give his kids a decent healthy lifestyle. So thanks to that not only am I rooted as a risk taker, my risk taking has come down to not moving to anywhere further than two kilometers to where I am currently staying. Else the commute and hence the schedule that Jasmine follows everyday will get awry. Wow. Risk aversion has a new meaning altogether.

No wonder I have noticed that even with the same firm, when we Indian go abroad we get highly politicized. We start playing games and we stop taking all kinds of risk. We only start doing stuff that protects our back side. We lick our boss’s derrières and we eschew all bold action. What if things go wrong? We would have to uproot our families from there and come back, in the middle of the school term that too. I saw this in our offices abroad and I saw this in my dad’s stories of when we were in Dubai. The politics is unbearable.

So I kind of agree with Richard Florida. Home ownership kills risk and mobility. We have a deep rooted desire to own our homes and the EMI’s coming with high cost of homes will kill us and our city. Luckily for Mumbai, the saving grace is that we have made renting slightly easier and relatively less risky. The Enforcement of leave and license agreements which are clear and solid has allowed for investors to give their homes on rent. Earlier the laws were completely in favor of the tenant and renting was akin to selling giving rise to a pagdi system in Mumbai. While we were in Dubai, our home was kept closed and locked rather than let out, as we were afraid we would not get repossession of our home when we needed it. No one really benefits from an asset that is underutilized.

I suddenly started thinking about this because of the conversation I had with Jasmine’s cousin. We are all from part of the baniya sect in the Hindu world order. This means we are essentially traders, businessmen by birth. It is our job to trade and to make profit. To be fast and flexible. He said, “us baniya, we should always be ready for mobility. In fact we baniya’s traditionally never bought houses.” I understood what he meant. If a trader is to thrive he must always be mobile, always ready to move to opportunity. Why else would Jasmine’s maternal grand-dad go all the way to Cochin, in an alien culture, to set up business. Her paternal Granddad came from Gujarat to Mumbai to set shop. My grand dad (maternal) went to Burma (Rangoon) to set shop and then came to Mumbai and set up his business. My Paternal Granddad moved from his home in Savarkundla in Gujarat to Mumbai to study and become a Doctor, after which he moved to Gondal in Gujarat to start his dispensary (it’s a business).

And now Jasmine and I are at loathe to even move three kms from our current home. Sheesh. Obviously we are no more baniyas. We have lost risk taking ability. That doesn’t bode well for our family. Or on the contrary it does. Simple predictable lifestyle. The shift from the hunter to the farmer. Possibly parenting is all that in our city. Growing roots. Staying in and withering away. Possibly we are the 55% giving the chance for the rest of the 45% to go out and push the envelope, take risks and be free.

While I was reading on Richard I came across his concept of ‘creative class’. An extract “Florida says that the Creative Class is a class of workers whose job is to create meaningful new forms (2002). It is composed of scientists and engineers, university professors, poets and architects, and also includes "people in design, education, arts, music and entertainment, whose economic function is to create new ideas, new technology and/or creative content” (Florida, 2002, p. 8). The designs of this group are seen as broadly transferable and useful. Another sector of the Creative Class includes positions that are knowledge intensive; these usually require a high degree of formal education (Florida, 2002). Examples of workers in this sector are health professionals and business managers, who are considered part of the sub-group called Creative Professionals. Their primary job is to think and create new approaches to problems. Creativity is becoming more valued in today’s global society. Employers see creativity as a channel for self-expression and job satisfaction in their employees.”

This creative class I see in the suburbs in Mumbai not in town. Town is old money, high rents, old houses and no buzz. Suburbs have buzz, have restaurants opening and closing at will, new ideas and of course the new age of creative people in design, arts and other stuff, pushing the bar.

I end on a story – once I met a friend of mine after a long time. She is in the creative field and her husband was setting up something in IT. they had bought a flat in the suburbs somewhere. While I was talking to her, she told me that the flat was bought on a home loan and then the price of the house had gone up crazy. Then in the middle of it all they thought of selling their home and pocketing cool ten to fifteen lakhs. (ten lakhs = one million). This they would spend a part of it touring Europe (Spain) and then shift to another house on rent. They would save on the EMI every month and pay a lesser rent, as well as have a sustainable life. At first I was appalled. What shit, sell an asset! Then I realised – you are young only once – have fun. And now I realize, selling their home and moving on rent to a smaller, cheaper place, gave them the flexibility to enjoy and follow their dreams. Being unencumbered by the EMI they could start a business and she could work free-lance. They could do something New and Not Conform to boring conformity. They wanted to be the ‘them 45%’ not the ‘us 55%’. I respect that. As a baniya, I genuinely respect that.

Interview on www.bigthink.com with Richard Florida. Full text here: http://www.bigthink.com/ideas/20243

This is so ironic, places with the highest levels of home ownership have low rates of growth; they tend to be older, lagging cities with older economic structures; they tend to be less innovative; they tend to have lower levels of human capital, of creative, economic activity; lower wages, lower incomes; and the people there have lower levels of well-being.

The ones that have lower home ownership, they’re stronger economies, they’re more innovative, they’re higher wages, higher incomes. And I thought about this and it’s not only that those cities are more expensive, right? Los Angeles and New York and San Francisco and Seattle and Boston, they’re not only more expensive, so obviously fewer people can afford houses. Actually by having a lower level of homeownership, and that’s around 50 or 55 percent, where the big, the cities that have a lot have 80. It actually makes them quite fast and flexible. And I find this really interesting. If you lose your job in Detroit or Cleveland, you own your house: you’re stuck. You can’t even move to another part of Detroit or Cleveland for a job, never mind to a place that might have more economic opportunity on the east or west coast. You’re stuck and you’re stuck with that house and you can’t get rid of it and you have to pay for it.

If you work in New York or Los Angeles or San Francisco and you lose your job, first thing you can do is downshift to a cheaper apartment, and if you need to move to a new region, when your lease ends, you can up and go. So I actually believe, the Urban Land Institute says we’re falling in home ownership. We’re going to come down to about, I think, they think, anywhere to about 62 percent, I think we’re going to go a little lower. I think a nice balance is about 55 percent, with the rest of the people renting. I do think we need to reinvent rental housing, though. I think the kind of rental housing we have now, where you go find a landlord on Craig’s List and you get a place and they don’t fix the windows and the dishwasher breaks and you’re doing it; that’s crazy. I think with all the condos that are vacant, in fact, we’re even seeing this in Miami. And I see this when I go to Miami, it’s actually my cycling route. I cycle down through the city and through the City of Miami, into Key Biscayne. You see all the condo towers that went bankrupt, that were distress sales, now being turned to rental. And what’s interesting is you’re renting from a real rental agency, the housing is nice and high quality, but it’s very affordable, lots of people are streaming back into downtown, empty nesters, young people, people with families, more street-level activity.

I even imagine something more than that, where you could sign up with Acme Rental Company, or XYZ Rental Company, and if your job changes in New York, or San Francisco, Toronto where I live, and you want to be closer to where you work, you can switch apartments. Or if you transfer to the West Coast or the Midwest or wherever it is, San Francisco, Chicago, you can basically be part of that rental company’s units there. Some way, and I think with the excess inventory—according to one analysis, we now in the United States have 8 years, 103 months, of excess housing inventory; well, somebody’s got to do something with that. If companies over the course of the reset in an entrepreneurial fashion begin to roll that up, begin to provide mass rental housing, if you will, and what gives me—I talk to a lot of developers and I speak to developers' forums, I was just at the Urban Land Institute: multi-family housing is one place people are actually profitable in.  

And just to spice up things a bit, here is a video I showed to one kid in office today. She went to Vashi station for the first time in her life and was impressed by it. When it was first constructed and Vashi was still a growing far flung suburb of Mumbai, the station won a lot of rave reviews. So much so that this movie song was also shot on location in the station. The actress is actually in the middle of eh song gyrating on the tracks. Development is always Sexy.